Preparing to Sell Your Business -
Identifying Assets

Preparing to Sell Your Business - Identifying Assets

In the last issue (#36), we discussed Preparing to Sell Your Business - Systematize and Document Your Business Operations. This issue will discuss Preparing to Sell Your Business - Identifying Assets.

A Favorite Famous Quote
"I do not believe you can do today’s job with
yesterday’s methods and be in business
tomorrow."  Nelson Jackson

Preparing to Sell Your Business - Identifying Assets

In preparing to sell your business it's important to identify the assets you intend to include in a sale and the assets you intend to exclude from a sale.

For example, personal automobiles driven by owners are often titled within the business, but owners have no intention of transferring them in the sale.  That's fine, as long as the exclusion is designated on the front end of the sale process.  You may have other personal property and assets in the business as well.  I've seen expensive artwork, tractors, home furniture and many other non-business assets being acquired and depreciated by the business.   In addition, some owners have unrelated business interests within their primary corporation.  For instance, I've seen a wood-burning stove business within a custom glass shop.  If and when that owner sells, buyers will not be interested in the secondary unrelated business and those assets should be excluded.  (In fact, the better solution would be to separately incorporate the unrelated business far in advance of a sale so that revenues and expenses are not co-mingled).

Learn the realistic value of your commercial real estate

For tax purposes, commercial real estate is usually owned personally by the business owner.  (If your corporation owns your real estate, consider getting some tax advice pretty quickly.)  In most instances it's best to separately sell or lease the real estate to the business buyer and specify it's exclusion from the value of the business.  To prepare for a sale, it's important to have a realistic estimate of the value of the commercial real estate.  However, imminent to putting the business on the market, it's best to obtain a professional appraisal from a qualified commercial real estate appraiser. Real estate considerations are explained in further detail in this newsletter article: Issue *86 Real Estate Transfer Issues.

Physically verify your asset list

Buyers, their advisors and their lenders require a list of assets to be transferred in a business sale.  Depending on the details in your depreciation schedule, it can be a good starting point to begin the development of a list of assets.  But, it's important to finalize the list based on a physical verification of the assets.  Assets on your depreciation list might have been thrown away and assets in your business might have been expensed in the year acquired and not be shown on the depreciation schedule.  If your list includes assets that are not present, it could lead to post-closing disputes.  A side benefit of the asset review is you might identify obsolete assets that can be sold, or identify assets that require repairs or maintenance to bring them back to operating condition.

Identify leased assets

When identifying assets, it's especially important to note those assets that are leased, for which there may be an ongoing liability to be transferred to a buyer.  If considered 3 - 5 years in advance, it may be advantageous to buy-out expensed (vs. capitalized) leases to improve cash flow by replacing the lease expense with depreciation expense which is added back for cash flow purposes.

Consider selling obsolete assets before selling your business

As discussed throughout our newsletters, the value of your business will be primarily driven by the profitability of the business, not by the assets you transfer.  You do have a moral obligation to transfer the assets that create your cash flow.  However, many small businesses have old or obsolete assets that may no longer be used.  If you have assets that do not contribute to cash flow, consider selling them for salvage value (or whatever value you might receive) before putting the business on the market.  It will not affect the value you receive for the business.  CAUTION!  These types of sale transactions may be questioned in due diligence so be sure the assets you intend to sell are not contributing to the business cash flow.  A good place to document the reasons/decision to sell assets is in the corporate minutes.

Conduct a physical review of your inventory

You should also conduct a physical review of your inventory when preparing to sell the business.  Old and obsolete inventory only raises issues in buyers' minds.  Consider segregating the older and obsolete inventory and selling that inventory before putting the business on the market.  As mentioned in Preparing to Sell Your Business - Improving Accounting Procedures, it's a good idea to review your inventory accounting procedures many years in advance of a sale.

Identify intellectual property

Your asset list should also include intellectual property and intangible assets such as patents, trademarks, copyrights, proprietary products/brands and exclusivity agreements.

Similar to documenting the systemization of your business, identifying assets provides ....